India’s Bleeding Gilt Funds Facing More Pain on Inflation Risks

  • Investors have pulled 28.5 billion rupees in four months
  • Funds “will continue to bleed for some more time”: Peerless

Indian mutual funds targeting government debt will probably see more pain after four straight months of outflows, according to Peerless Funds Management Co., as inflation risks dent the outlook for monetary easing.

Investors pulled 8.4 billion rupees ($126 million) from so-called gilt plans in May, data from the Association of Mutual Funds in India show. That took withdrawals to 28.5 billion rupees in the last four months, the longest stretch since June 2014. The “surprise” acceleration in consumer-price gains to a three-month high of 5.39 percent in April made “the future trajectory of inflation somewhat more uncertain,” Reserve Bank of India Governor Raghuram Rajan said Tuesday as he left benchmark interest rates unchanged.

Credit Suisse Group AG, Australia & New Zealand Banking Group Ltd. and Nomura Holdings Inc. don’t expect the central bank to cut rates in 2016, as a looming salary increase for civil servants and rising oil and food costs pose risks to its inflation target of 5 percent by March. Rajan left the key repo rate at a five-year low of 6.5 percent on Tuesday, but said the “stance of monetary policy remains accommodative.”

“Bond funds will continue to bleed for some more time,” said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds, which oversees 9.9 billion rupees. “Much of the party on rates easing is done with and hence there isn’t any meaningful room for capital appreciation.”

A three-month rally in India’s 10-year sovereign bonds ended in May as foreign holdings of rupee-denominated government and corporate notes dropped by 48.6 billion rupees during the month, the most since February. The yield on the notes maturing in January 2026 has climbed five basis points since the end of April and closed little changed at 7.49 percent on Thursday.

“Flows into government-bond funds will be uncertain,” said Soumyajit Niyogi, associate director at India Ratings & Research Pvt., a unit of Fitch Ratings. “Given the risks to inflation, the room for the central bank to cut rates is rather limited.”

The rupee ended 0.1 percent lower at 66.72 a dollar in Mumbai, snapping a five-day winning streak that was its longest since early April, according to prices from local banks compiled by Bloomberg.

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